Softcat CEO on 11% staff pay hike, ChatGPT and adding 'good' event costs back into the business

Graeme Watt and Graham Charlton sit down with CRN to chat through Softcat's interim 2023 results

Softcat's interim 2023 results this morning showed a steep fall in gross invoiced income growth and dip in operating profits.

But its strong underlying performance in the period to 31 January 2023 went down well with the stock market as its shares surged by more than five per cent.

CRN digs into the numbers with CEO Graeme Watt and CFO (and CEO in waiting) Graham Charlton…

Hi Graeme and Graham. How would you assess the interim results?

GW: Strongly positive. We've achieved what we set out to do and more. We've comfortably exceeded expectations [against a backdrop] where there were questions about what that demand environment has been.

Your GII growth slowed from 29 per cent last year to five per cent in your fiscal first half of 2023. How much of that was due to the hole left by that key customer you referenced in your results statement?

GC: Almost all of it. If you removed the impact of that customer from both periods, GII growth would have been above 25 per cent, so it was entirely due to that change.

You gave an 11.1 per cent average pay award at the start of your fiscal year. Why did you go so high?

GW: At the time, recruitment was difficult and attrition was higher than we wanted it to be.

We'd got a little bit far off on benchmarks on the sales side specifically. Within that 11 per cent, we increased the standard pay review across the board to take into account the cost of living pressures that we've seen. Then on top of that we put in an amount, particularly around sales and sales support, to bring it closer to the market.

We have seen attrition drop sharply, our ability to recruit [increase] and our employee net promoter score has gone up to 63. So there have been some profoundly positive impacts of making those adjustments.

Your run of 68 successive quarters of organic profit growth came to an end with these results. Was that inevitable?

GW: Given the circumstances, it was, and that's why we trailed it so visibly. It was important for us to set the right expectations to the market, and to our people.

It was down to a customer that was spending exceptionally high levels last year that we knew wouldn't repeat this year, the salary inflationary elements that we talked about, and the ability to do some things we couldn't do during the pandemic. Our incentives and our company events came back in. These are costs we obviously wouldn't let come back into the business if we didn't think they were good and highly value add costs.

The culmination of those [three things] meant that we would most likely not be able to return another growth in operating profit in the half. As it happens, we came very close to doing that, because of our over-performance in the period.

We didn't quite make it, but that's okay. The underlying performance of the business is really strong and positive.

You referenced AI as one of the rapidly growing technologies you have an opportunity to help your customers with. As the CEO of a tech firm, how do you view ChatGPT?

GW: I think we're still trying to get our head around what it might mean for us specifically. Anything that's generating the need for data and compute is excellent for our business. It drives people to more on-premise capacity, it drives people to the cloud. All of that stuff needs to be secure, so it's got to be good for us.

In the interim report you said you are 'monitoring' inorganic growth opportunities. How likely is it that you will make an acquisition in the next 12 months, and what kind of opportunities would you potentially consider?

GW: Our primary strategy is organic growth. We've got a wonderful opportunity ahead of us. We have about five per cent marketshare - that's around 25 per cent share of wallet in the customers that we're already addressing, and we only address 20 per cent of the available market. So there's lots of organic growth to go after.

But don't assume that we'll never do any M&A. We think we have a responsibility to know what opportunities are out there. And that's what's behind our statement that we're monitoring inorganic opportunities. It could be around a new market, or it could be around emerging capabilities. But to put a percentage on it is impossible.

You said the chip shortage is ‘dissipating'. Can you call an end to it completely, or does it have a while left to run?

GW: We didn't make a big thing about it as it was building. If I'm honest, it was creating more administrative work than it was a massive headwind to performance.

Therefore, as it's unwound, it hasn't been a big tailwind to performance. But it has stopped all the to-ing and froing with customers and back up through the channel, to establish what inventory is coming when.

There are still shortages on the networking side and some switches. But by and large I think most vendors are saying it's behind them now and that's the evidence of our eyes too.

Graham (pictured below), how might Softcat change after you take over this summer?

GC: We obviously signalled it a while ago so it's a very orderly and gradual transition for us. It feels like quite a natural process internally. The reasons I want to do the job are based around Softcat's history and being an amazing place to work. That's the thing we think about first and foremost that absolutely won't change through the transition. I'm really excited, but there are no shifts in strategy or changes in direction to be expected; it's about keeping this great business pointed in the right direction.